UNDERSTANDING HOW CREDIT SCORES WORK
A credit score is a numerical representation of an individual’s creditworthiness, based on their credit history. It plays a crucial role in determining whether a person is eligible for a loan or credit card, and at what terms. Financial institutions rely on credit scores to assess the risk of lending to a particular individual. We’ll now explore how to check credit scores, what factors influence them, and why maintaining a good score is crucial.
WHAT IS A CREDIT SCORE?
A credit score is a three-digit number that reflects the creditworthiness of an individual. It ranges typically between 300 and 900, with a higher score indicating better creditworthiness. This score is derived from the individual’s credit history, which includes information on their loans, credit card usage, payment history, and other financial behavior.
CREDIT RATING COMPANIES IN INDIA
The Reserve Bank of India (RBI) has licensed four authorized credit rating agencies in India to provide credit scores. These agencies gather and analyze financial data to generate a credit score for individuals and organizations. The four major credit rating companies are:
- TransUnion CIBIL: Commonly known as the CIBIL score, this is one of the most recognized credit scores in India. It is widely used by financial institutions for assessing loan and credit card applications.
- Equifax: A collaboration between American and Indian companies, Equifax provides credit reports in a user-friendly format, making it easier for individuals and organizations to understand their credit status.
- Experian: An international credit bureau with a strong presence in India, Experian offers credit scores and detailed reports. Notably, it allows individuals to check their credit scores for free via WhatsApp, making it highly accessible.
- CRIF Highmark: A purely Indian company, CRIF Highmark boasts the world’s largest microfinance credit database and provides credit scores for individuals and organizations.
HOW TO CHECK YOUR CREDIT SCORE?
Each of the four credit bureaus allows individuals to check their credit score for free once a year. Additionally, there are several websites that offer this service for free. To check your credit score, you can visit the website of any of these credit bureaus and provide details such as your Aadhar card, PAN number, and other personal information. Experian, in particular, has made the process even more convenient by allowing users to request their credit score via WhatsApp.
UNDERSTANDING THE CIBIL SCORE RANGE
The CIBIL score, like other credit scores, ranges from 300 to 900. Here’s what each range signifies:
| CIBIL Range | Rating | Implication |
|---|---|---|
| 300-499 | Poor | High risk of loan rejection. |
| 500-649 | Average | Possible loan approval at high-interest rates. |
| 650-749 | Good | Likely loan approval at moderate interest rates. |
| 750-900 | Excellent | Easy loan approval at low-interest rates. |
Individuals with a score above 750 are considered highly trustworthy by lenders and are more likely to receive loans at favorable terms. Conversely, those with lower scores may face challenges in securing loans and credit cards, and may only be able to obtain them at higher interest rates or under restrictive conditions.
FACTORS INFLUENCING YOUR CREDIT SCORE
Credit bureaus calculate your credit score based on various factors related to your financial behavior:
- Active Credit Accounts: This includes mortgages, credit cards, overdrafts, loans, and any record of late payments, missed payments, or defaults.
- Credit Agreements: Financial agreements such as mobile phone contracts, car finance, and home finance contribute to your credit score.
- Buy Now Pay Later Services: Payments made through these services, which allow for interest-free installment purchases, can also impact your credit score.
- Recently Closed or Settled Credit Accounts: The status of your recently closed or settled credit accounts is taken into consideration.
- Public Record Information: Legal records, such as County Court Judgments (CCJs), bankruptcies, and Individual Voluntary Arrangements (IVAs), can significantly affect your credit score.
- Fraud and Identity Theft: Any history of fraud, whether committed by you or against you, such as through a stolen identity, can influence your credit score.
CONCLUSION
Understanding your credit score and the factors that affect it is essential for maintaining financial health. A good credit score opens doors to better loan offers, lower interest rates, and a wider range of financial products. By regularly checking your credit score and making informed financial decisions, you can ensure that your creditworthiness remains strong, making it easier to achieve your financial goals.
